Kenilworth-based Merck announced its intention to spin-off products from its women’s health, trusted legacy brands, and biosimilars businesses into a new, yet-to-be-named, independent, publicly traded company. The spinoff will allow both management teams to drive increased responsiveness to the particular needs of their patients and customers and achieve faster growth through focused and fit-for-purpose operating models, Merck said.
Merck will continue to benefit from strong growth across its current key pillars of oncology, vaccines, hospital and animal health, while remaining fully committed to investing in research and development in pursuit of breakthrough innovations across all areas of science and to driving value from its deep late-stage pipeline, it said. As a research-intensive biopharmaceutical company, Merck will continue its pursuit to advance the prevention and treatment of diseases that threaten people and communities around the world, the company said.
“Over the past several years, we have purposefully shifted the focus of our efforts and resources to our best opportunities for growth,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “This has led to the exceptional results we are reporting today. Given the opportunities now in front of us, we believe we can benefit from even greater focus. At the same time, we believe additional resources and focus will help ensure that our expansive portfolio, including many trusted and medically important products, reach their full potential. We have therefore made the decision to separate into two growth companies: Merck and NewCo. By optimizing our human health portfolio, Merck can move closer to its aspiration of being the premier research-intensive biopharmaceutical company, while also properly prioritizing a set of products at NewCo that are important to public health and the patients who rely on them, and which present real opportunities for growth.”
Compelling Strategic Rationale for Spinoff
Merck believes the spinoff will deliver significant benefits for both Merck and NewCo and create value for Merck shareholders. The transaction is expected to create two companies with:
Merck will retain its current growth pillars of Oncology, Vaccines, Hospital and Animal Health and continue to invest in research and development of breakthrough innovations across all areas of science. Led by highly innovative products, including KEYTRUDA (pembrolizumab), Lynparza (olaparib), Lenvima (lenvatinib mesylate), GARDASIL (Human Papillomavirus Vaccine, Recombinant), BRIDION (sugammadex), ZERBAXA (ceftolozane and tazobactam), and BRAVECTO (fluralaner), as well as its leading diabetes business and other key products, Merck will continue to benefit from broad commercial scale and remains committed to ensuring continued access to its innovative medicines across the globe.
The spinoff of NewCo will reduce Merck’s Human Health manufacturing footprint by approximately 25% and the number of Human Health products it manufactures and markets by approximately 50%. This will allow for a more focused operating model in support of its growth products. As a result, Merck expects to optimize its resources, grow faster and achieve meaningful operating margin expansion over time through increased productivity and efficiency.
NewCo will pursue global leadership and focused, sustainable growth in Women’s Health led by the growing and patent-protected NEXPLANON (etonogestrel implant) franchise and fueled by its leading contraceptive and fertility businesses. NewCo expects to establish a leading position in Biosimilars along with its partner, Samsung Bioepis Co., Ltd., focusing on its current portfolio including RENFLEXIS (infliximab-abda) and BRENZYS (etanercept) in immunology and ONTRUZANT (trastuzumab-dttb) in oncology, and is well-positioned to be a partner in the commercialization of biosimilars worldwide. NewCo will have a large portfolio of highly profitable and trusted brands consisting of dermatology, pain, respiratory, select cardiovascular products including ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), as well as the rest of Merck’s Diversified Brands, with strong cash flows that will support investments in future growth opportunities. In addition, NewCo will pursue opportunities to partner with biopharmaceutical innovators looking to commercialize their products by leveraging NewCo’s scale and presence in fast growing international markets.
NewCo will have a global footprint with approximately 75% of sales generated from ex-U.S. markets, significant scale and geographic reach, world-class commercial capabilities, and approximately 10,000 to 11,000 employees. NewCo is expected to be headquartered in New Jersey.
Merck Targeting 40%+ Operating Margins by 2024; Believes Revenue Potential is Underappreciated; Retaining Current Dividend
Merck expects strong revenue growth each year through 2024, which will accelerate as a result of the spinoff.
Merck continues to expect meaningful operating margin expansion over time. The spinoff of NewCo should enable Merck to achieve incremental operating efficiencies in excess of $1.5 billion by 2024, while continuing to increase investment in key growth drivers and pipeline assets. Merck is therefore targeting Non-GAAP operating margins greater than 40% in 2024, higher than what Merck expected to achieve pre-spinoff.
Merck expects to receive $8 billion to $9 billion through a special tax-free dividend from NewCo. Merck expects that these funds will be allocated to business development or share repurchases and will provide more details about the planned usage of these funds closer to the spinoff date.
Merck will retain its current 2020 dividend of $2.44 per share and anticipates future increases with the goal of achieving a 47% to 50% payout ratio over time.
Shareholders holding both Merck and NewCo post spinoff are expected to benefit from increased combined non-GAAP (generally accepted accounting principles) earnings per share assuming dilution (EPS) over time, as well as higher combined dividends. The combined non-GAAP EPS of the two companies is expected to be nominally lower initially than what Merck would have achieved pre-spinoff, reflecting costs necessary to operate NewCo as an independent company. However, as a result of the incremental growth that NewCo is expected to achieve, combined with the benefit of ongoing operating efficiencies at Merck enabled by the spinoff, the company expects Merck and NewCo to realize higher combined non-GAAP EPS within 12 to 24 months post-spinoff.
The products to be spun off into NewCo are expected to generate 2020 revenue of approximately $6.5 billion within Merck, with a non-GAAP operating margin of approximately 45%. As an independent company from a 2021 base-year of approximately $6.0 billion to $6.5 billion in revenue, NewCo is expected to achieve low-single-digit revenue growth. Inclusive of costs necessary in standing up NewCo as an independent company, non-GAAP operating margins are expected to be in the mid-30% range in the first year post separation and increase over time. NewCo’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are expected to be in the low-to-mid 40% range in the first year post separation and increase over time.
NewCo is expected to have $8.5 billion to $9.5 billion in initial debt, with substantial cash flow that will provide ample financial flexibility for potential business development, debt paydown and a meaningful dividend. This expected dividend will be entirely incremental to Merck’s dividend.
NewCo to be Led by Experienced Pharmaceutical Executives
Kevin Ali, who brings three decades of pharmaceutical commercial experience from within Merck, will be named chief executive officer of NewCo. Ali has led Merck’s enterprise portfolio strategy initiative, reporting to Frazier, for the past year. Prior to this, Ali served in many leadership roles within Merck, including president, MSD International; president, Emerging Markets; senior vice president in charge of the Bone, Respiratory, Immunology and Dermatology franchise; managing director of Germany and managing director of Turkey.
“Built on the foundation of a trusted, high-quality portfolio, NewCo will help people around the world live healthier lives, with a special focus on investing in innovations for the distinct healthcare needs of women,” Ali said. “We are committed to becoming a leader in Women’s Health driven by organic and inorganic opportunities fueled by our portfolio of trusted legacy brands and our commitment to growing our rapidly expanding biosimilars business.”
Carrie Cox will be named NewCo’s Chairman of the Board of Directors. Cox has extensive experience in the pharmaceutical industry and deep expertise in women’s health, formerly serving as chairman of Array BioPharma Inc., CEO and chairman of Humacyte Inc., president of Global Pharmaceuticals at Schering-Plough Corporation (acquired by Merck in 2009), executive vice president of Pharmacia Corporation and vice president of Women’s Health Care at Wyeth-Ayerst Laboratories, Inc.
“I am delighted to be joining the leadership of NewCo and excited by the growth opportunities in its portfolio,” Cox said. “The time has come for a company dedicated to serving the healthcare needs of women, in addition to a broad portfolio that continues to be important for the public health needs of patients around the world.”
More information about NewCo board, governance structure and management team will be provided in the future.
Transaction Intended to be Completed in the First Half of 2021
The transaction is intended to take the form of a tax-free distribution to Merck shareholders of a new publicly traded stock in NewCo. The spinoff is expected to be completed in the first half of 2021, subject to market and certain other conditions.
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